The 61-year old wood frame apartment building on West 11th Avenue in Vancouver doesn’t look like much. No balconies outside; no elevator, granite countertops or stainless steel inside.

It only has 10 rental units. But when the building sold this spring each of the old suites was worth $360,000, or more than $335 for each creaky square foot.

Like many aging Vancouver apartment buildings, it had doubled in value in the past 10 years and represents the most seductive real estate investment in Canada.

Sales of rental apartment buildings in Metro Vancouver are forecast to top $1 billion this year for the first time and the price per door appears irrelevant.

Describing the market as “explosive”, Vancouver realtor Mark Goodman, a multi-family specialist with HQ Commercial notes that in three recent apartment building sales two were sold with unconditional offers and for more than the asking price.

“It is all about search for yield,” said Don Campbell, founding partner and senior analyst with the Real Estate Investment Network, “the price is not all that important.”

As Campbell explains, the typical capitalization rate on a Vancouver rental property is often tiny: in the 3.2 per cent range. But investors can secure government-insured mortgages for around 1.8 per cent, which is lower than the annual rental increase allowed under B.C. residential tenancy rules.

“The money is free,” Campbell said.

As well, with Vancouver’s 1.4 per cent rental vacancy rate – among the lowest in North America – landlords are virtually guaranteed full vacancies.

For sophisticated investors, which Campbell said compose affluent baby boomers, professional landlords and offshore investors, rental buildings represent a method of both protecting capital and gaining yield. Smaller investors may be attracted by the opportunity of securing their own home in a rental building, while banking income – all with the potential of windfall appreciation.

Price appreciation

A Colliers International study of the trending Fairview neighbourhood in Vancouver shows that typical old apartment buildings have been gaining 14 per cent to 22 per cent in value annually for the past decade. Similar trends are seen in other popular city neighbourhoods, particularly near SkyTrain nodes where higher-density development is possible.

Campbell’s advice for smaller investor landlords is to look now at lower-cost suburban and Fraser Valley markets with transit access, such as New Westminster and Surrey.

Goodman expects a total of 155 sales in the Lower Mainland this year, the third-best tally ever. Given the recent pricing, that could put the aggregate value of those sales in the $1 billion range – a first for the region.

Tracking by Goodman indicates that 74 sales occurred in the first half of 2015, versus 61 in the same period last year. The total value of the deals was $458.9 million, with the majority in Vancouver proper even though sales were evenly split between the city and surrounding municipalities.

Per-suite pricing tells the story: while the average for all deals done in the Lower Mainland was $238,272 per door – $7,000 more than in the first half of 2014 – the average per-suite price in Vancouver rose 10 per cent to $332,653, while elsewhere prices dropped 7 per cent to $189,296 a suite.

However, a quarter of the 1,268 suites changing hands outside Vancouver were located within a single property in Surrey. The larger scale of the property effectively resulted in lower pricing for the units, reducing the overall average.

A long-standing issue has been Vancouver’s restrictive policies in the residential multiple-dwelling zones that are home to most of the city’s purpose-built rental stock, Goodman noted. While the city seeks no net loss to the existing stock, it was equally opposed to a recent proposal to replace a 16-unit building in Kitsilano with an 80-unit structure.

With vacancies for the region down 28 per cent in the latest Canada Mortgage and Housing Corp. rental market survey, and apartment stock up by just 648 units region-wide, or 0.6 per cent, Goodman warns that tenants face less choice and higher rents.

Some landlords are boosting rents by up to 20 per cent between tenancies, he said.

Still, Goodman said more Metro Vancouver apartment buildings could come to the market this year. “Owners, who previously would never consider selling, are now being swayed by mind-blowing dollar amounts,” he said.

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